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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.

Permanent Life Insurance: A Tax Advantaged Savings Vehicle

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  • Permanent Life Insurance: A Tax Advantaged Savings Vehicle

by | May 19, 2015

Life insurance can be much more than just a death benefit, there are several key tax advantages that make permanent life insurance an interesting savings vehicle for many different investors. Such benefits include: tax deferred growth, tax free loans, tax free death benefits and lower estate taxes.

Tax Deferred Growth

Earning on the cash value within a permanent policy accumulate tax-free or tax deferred, depending on whether the gains are distributed at death or during lifetime respectively. In this aspect, permanent life insurance acts much like a Roth IRA in that you can put after tax dollars into these vehicles and grow that money tax deferred for the duration of your lifetime. A Roth IRA however does have contribution limits and my not be accessible to all investors. Withdrawals from a Roth IRA during one’s lifetime may be subject to penalties and tax implications if taken prior to age 59 1/2 and not held for at least 5 years.

Tax Free Loans

Permanent life insurance policy owners have access to their cash value on a tax advantaged basis. Once there is a buildup in cash value this money can be borrowed against and used for several reasons including: purchasing a home, investing in a business, handling a financial emergency, supplementing retirement income, and even paying for college. Because of the tax benefits of these loans, it can be a better alternative to borrowing from a 401(k) or taking a home equity loan. Please keep in mind that these loans are charged interest and reduce the death benefit and cash value; if a policy lapses or is surrendered with an outstanding loan, a portion may be taxable; and there are certain polices that are subject to different tax laws. Please keep in mind, depending on the type of permanent policy you purchase, a withdrawal from the cash value may affect the policy premium and the overall life of the policy.

Tax Free Death Benefit

The death benefit of a life insurance policy is passed on to beneficiary without any deductions or withholding. As such, a $250,000 death benefit life insurance policy pays $250,000 to the designated beneficiary.

Strategy to Potentially Avoid Estate Taxes

Although death benefits are passed to beneficiaries’ income tax free, this can be subject, with the rest of your estate, to a tax rate of 35-40% based on the size of your estate. You can avoid potential estate taxes on life insurance death benefits by transferring ownership of the policy to an irrevocable life insurance trust (ILIT) more than three years before your death. This way you can pass on your entire death benefit tax free and potentially avoid estate taxes altogether. An Irrevocable Life Insurance Trust (ILIT) is a complex legal agreement that is subject to both tax and legal regulations and should be discussed with an attorney and/or tax professional prior to taking any action

Permanent life insurance is a very flexible asset that can provide value to your financial plan in several ways. However, each insurance policy is different so it is important to consult a financial representative and tax advisor to see if permanent life insurance suits your financial needs and goals.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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